PNB Housing Finance-IPO Analysis

About the issue
PNB Housing Finance will hit the markets with an initial public offer from October 25 to October 27,2016. This will be the second largest IPO after ICICI Prudential Life Insurance of 2016. The company will raise Rs 3000 crore through this IPO in the price band of Rs 750-775 for face value of Rs 10. This IPO is not an offer for sale. Punjab National Bank has 51 per cent stake in PNB Housing Finance which will drop to 35 per cent post the IPO. 

Purpose of the IPO
The company will utilise net proceeds from this IPO to augment the capital base to meet their future capital requirements; for general corporate purpose; and to enhance visibility and brand name among existing and potential customers.

Industry Outlook
In India, the housing industry is recognised as having an important impact on the country’s development, civic life and human capital formation. In particular, the government’s push for affordable housing projects, reductions in interest rates, urbanisation and rising income levels are expected to contribute towards increased housing demand. As of July 2015, India was home to more than 1.25 billion people and the median age of its population was below 28 years of age. (Source: World Factbook). The housing market has been growing on account of factors such as population migration to urban centres, income growth and demographic composition. IMaCS has forecasted that the housing finance market in India will grow 20.00-22.00 per cent from FY15 to FY20. 

CRISIL expects housing loan disbursements to have grown at a five-year CAGR of 19.00-21.00 per cent to reach Rs 8.30 trillion by FY20, aided by mortgage penetration, higher average ticket sizes and demand for affordable housing. Overall we see healthy growth atmosphere for HFC.

Company Outlook
PNB Housing Finance (PNBHF) is the fifth largest Housing Finance Company (HFC) by loan portfolio and one of the fastest-growing housing finance companies (HFCs) in India. PNBHF has a diversified product suite comprising housing and non-housing loans. As on FY16, housing loans comprised 70 per cent of the total loans, with retail home loans comprising 87 per cent of housing loans (60 per cent of total loan portfolio) and construction finance comprising the rest. Within non-housing loans, LAP comprises 60 per cent (18 per cent of the total loan portfolio) and lease rental discounting and corporate term loans comprise the rest. The target customers constitute of salaried (40 per cent) and self-employed customers (43 per cent) for its housing loans. Diversified portfolio and customer centric approach results in stout brand recognition. 

The geographical reach of its business covers the northern (39.67 per cent of loan portfolio), western (30.40 per cent of loan portfolio), and southern regions (29.93 per cent of loan portfolio) of India. As of June 30, 2016, it had 47 branches that were supported by 16 processing hubs, and three co-located zonal offices. Strong distribution network helps it for deep penetration in key Indian urban markets.

PNBHF maintained stable margins in the range of 290-300 bps over last four years. PNBHF’s loan book has grown at CAGR of 68 per cent over FY13-16. This growth is mainly attributable to lower base, faster geographic expansion, and relative lower penetration for housing finance business. However, we expect the growth momentum to continue but at moderate pace. 

PNBHF is able to raise funds from the money markets at a competitive rate, largely due to strong parentage (PNB & Carlyle group). Over the last 4 years, PNBH has reduced its dependence on bank funding substantially and has been able to raise funds via NCD, CP as well as public deposits. Strong parentage & management bandwidth with stable credit rating has allowed access to low cost funds.

Management
Sanjay Gupta was appointed as the MD of PNBHF in 2010. Having worked with MNCs like AIG, ABN Amro Bank & HDFC Ltd., he along with the newly hired professionals from pvt sector have been the key behind the growth. PNBHF has delivered a phenomenal 68 per cent CAGR in loan book over FY12-16, which has resulted in 43 per cent CAGR in PAT growth.

Financial Performance


NII of the company is consistently growing at five year CAGR of 40 per cent to Rs 684 crore in FY16. The company shows rise in PAT by 77 per cent in FY16 on a yearly basis. PNBHF has cost/income ratio of 30 per cent which is higher than peers, and gives it a scope for cost rationalisation. PNBH has managed strong asset quality, with GNPAs/NNPAs at 0.22 per cent and 0.14 per cent respectively (one of the best in industry) & better than large pvt players. NIM at 2.51 is lower than other HFC’s. We believe to see improvement in NIM post issue of the company. IPO will also help to improve capital adequacy ratio of the company which is at 13.04 per cent in Q1FY17. 

Peer Comparison and Valuation
PNBHF has delivered RONW and ROCE of 17.6 per cent and 10.09 per cent respectively. PNBHF looks decent with EPS of 27.58 and upper band P/E of 28.1x as compared to peers like HDFC, Gruh Finance, Repco Home Finance. Considering consistent growth, good financial numbers, aggressive management and moderate valuation status, we can see upto 15 per cent upside in IPO post issue. So, we recommend to go for subscription of this second largest IPO.